7. Antitrust Policy in a Free Society

The argument against antitrust policy presented here has, to this point, been entirely economic. There are, however, some non-economic considerations that must be brought to bear on any critical analysis of antitrust regulation. Antitrust laws stand in direct violation of civil liberties, individual rights, and due process of law, and these considerations can have important implications for the economic, or efficiency, arguments for antitrust regulation. Indeed, seen from our perspective, liberty need not be sacrificed to promote efficiency; contrarily, we will argue that only the full protection of all property rights is consistent with social efficiency.

Liberty

The administration and enforcement of the antitrust laws have always posed very serious difficulties for those committed to strict notions of individual rights, consent exchange, and due process.¹ The antitrust laws, by their very nature, appear to interfere with private-property rights.² The antitrust prohibition of price discrimination, merging, price fixing, and even free-market monopolization prevents freely contracting parties who hold legitimate rights to property from making, or refusing to make, certain contractual arrangements that they believe to be in their best interests. Some economists still argue that there is sufficient reason to prohibit such arrangements from a traditional efficiency perspective, although, as has been argued, the economic case for any antitrust regulation is weak. Traditional economic considerations aside, however, private and peaceful activities such as price discrimination, merging, tying, and price fixing violate no property rights in the ordinary sense of the term; that is, they do not necessarily involve force, fraud, or misrepresentation. Yet, from a strictly natural-rights perspective, the antitrust laws themselves which regulate private and peaceful trade are inherently violative of property rights. As noted earlier, even Adam Smith, despite his reservations concerning price conspiracy, rejected any antitrust law on the grounds that its execution could not be made “consistent with liberty and justice.”

Some critics would argue that business people and corporations forgo their right to full liberty when they collude and restrict production, since such behavior violates the rights of potential buyers. But this understanding of rights is misguided. Producers own their property, or are the trustees of property for owners, and possess all the rights to it, including the absolute right not to use it at all. Similarly, consumers have full rights to their own property, including the absolute right to spend or not spend their own money. The individual rights (property rights) of neither party can be violated by a refusal to deal or by a partial refusal to deal through, say, some voluntary restraint of trade.

A consumer boycott of a manufacturer’s product, for example, does not violate the property rights of the manufacturer; the manufacturer has no right to the consumer’s income in the first place. Likewise, a restriction of production on the part of a manufacturer—a producer boycott—cannot violate the rights of consumers, since consumers, absent any contractual arrangement, have no property rights to the manufacturer’s product. Thus, restrictive agreements such as price fixing—though unpopular—are not invasive of anyone’s rights, and government restriction of these voluntary arrangements is, from a rights and liberty perspective, completely unjustified.

An additionally important part of the case against antitrust law and enforcement relates to basic questions of due process and justice. Prior to an antitrust action and any alleged violation of the law, no one can know with any reasonable certainty what it means to “reduce competition substantially” or to effect “unreasonable” restraints of trade; no one can know with reasonable certainty what a given relevant market is or whether prices were reduced to meet competition in “good faith.” Firms that innovate new products or lower prices may discover, years after the fact, that such practices injure competitors, lessen “competition,” and violate the law. But because antitrust “law” cannot be known beforehand with any degree of clarity, antitrust law and agency enforcement are capricious and arbitrary, and those firms and individuals tried under it can hardly be said to have experienced any real due process of law.³

Social Efficiency

Although most economists are reluctant to discuss normative questions of liberty and rights Per se, they do acknowledge in the antitrust area that some freedom, say, the freedom to collude, must be sacrificed (traded off) in order to preserve competition and an efficient allocation of resources. And although free markets with carefully defined property rights are held generally to promote economic efficiency, maximizing wealth and minimizing cost, there are alleged to be important exceptions such as price collusion, where it would be permissible to regulate. Thus, liberty must allegedly be sacrificed for efficiency.

Some theoretical and empirical arguments against this trade-off position have already been raised. Here, however, it will be argued that the standard neoclassical theory of efficiency and welfare is untenable and that individual liberty and the complete protection of all property rights can, in fact, be reconciled with economic efficiency properly understood.

Subjective Cost and Benefit

The conventional theory of social efficiency in antitrust-regulation depends upon the measurability, at least in principle, of consumer and producer surpluses. The gains and losses associated with so-called restrictive practices are to be weighed and, since efficiency considerations are relevant, only business practices that result in a net increase in social welfare are to be permitted. Other practices, price fixing, for example, are said to create a dead-weight welfare loss and should not be permitted.⁴ But the problem with these “calculations” is that they cannot actually be made; because individual costs and benefits are ultimately subjective and personal, they cannot simply be added up or subtracted to determine net social efficiency or welfare. As I have stated elsewhere:

The costs of an action are the subjective opportunities forgone by the person who makes the decision; the benefits are the subjective satisfactions.... Since costs and benefits are subjective they are not cardinally measurable. There is no standard unit of value that would allow the summing up of individual costs and benefits into social aggregates for comparison. Thus, it is misleading to suggest that a rational antitrust policy can weigh the costs against the gains of restrictive agreements, and then decide which agreements are socially efficient and which are not.⁵

A metaphor can illustrate the inherent difficulties of aggregating personal costs and benefits. Assume a temperature of 70 degrees in a room. It is apparent that different people in that room can feel either warm or cold; the 70 degree figure does not actually measure how cold or warm individuals feel but only the level of mercury on an objective scale. The subjective states of warm and cold are not themselves directly knowable or measurable by others, and they are not susceptible to addition, subtraction, comparison, aggregation, or any other mathematical manipulation. Temperature readings can be averaged, but feelings of comfort or discomfort on the part of different individuals cannot be manipulated mathematically. Neither can their individual costs and benefits.

A perspective on social efficiency well within the neoclassical paradigm is the argument that all business agreements ex ante can lower costs and that, since opportunity costs are ultimately subjective and personal, such savings can always offset any so-called welfare losses due, say, to higher prices. The easy assumption in antitrust has always been that the costs associated with certain horizontal agreements greatly outweigh the benefits, if any, and therefore that their regulation or prohibition is justified. Yet, if costs are inherently subjective, there is no way cost-benefit judgments can ever be so certain.⁶ Market-division agreements may end expensive cross-hauling and advertising. Agreements between competitors in transportation could reduce information and transaction costs. Horizontal agreements that reduce risk and uncertainty could promote efficiency. And since only the individual parties to an agreement can know the costs and benefits associated with it, no antitrust regulation of horizontal agreements could ever be entirely rationalized.

Plan Coordination and Efficiency

Another even bolder perspective on social efficiency is termed “plan coordination,” which holds that all voluntary agreements, including so-called restrictive agreements, promote efficiency since all aim, ex ante, to bring into coordination the respective plans of various market participants. Since market information is neither perfect nor constant, this process of coordinating plans through agreement can never attain any final equilibrium. But, as already argued, an end-state equilibrium cannot be the focus of any analysis of efficiency. Instead, the institutional property-rights framework and the open market process are the focus of analysis, and they continuously create powerful incentives to discover and utilize the best information available in order to coordinate plans and correct those that fall short of objectives. Thus, an efficient market is an open and learning market, one that tends to provide the widest scope and encouragement for private plan making, private plan correction, and private plan coordination.

This approach to market efficiency allows an unambiguous condemnation of legal restrictions on competition, cooperation, and entry as being socially harmful—inefficient—since they directly restrict market information and the scope of voluntary plan coordination.⁷

A plan-coordination theory of market efficiency would completely undercut antitrust regulation. All business mergers and all joint ventures would be seen as socially efficient arrangements aimed at achieving some mutually determined business goal; they could no longer be regulated by Department of Justice or FTC in the name of efficiency. Further, the long-standing industrial organization anxiety over highly differentiated products would be seen as an illegitimate debate over ends, not means. Finally, the traditional antitrust concern with high market share, concentration, and entry barriers would be seen as entirely misplaced. Any market share and any level of market concentration would be the necessary outcome of an open market process of voluntary plan coordination. The only efficiency-relevant barriers would be those, like antitrust policy itself, which legally restrict free trade. And those, of course, should be repealed.

Conclusions

Adam Smith was convinced that the system of natural liberty—the free market—would promote the public’s economic interest and that government regulation tended to hinder the workings of the competitive market process. He was particularly concerned that legal monopoly—at the behest of specific manufacturing interests—would be employed to restrict free entry into markets and raise prices to consumers. He was aware that businessmen themselves often met to conspire to raise prices; yet he was reluctant to endorse laws to prevent it because they would not be compatible with liberty.

Was Smith’s view naive? On the contrary, after more than one hundred years of experience with antitrust laws, Smith’s insights on monopoly appear particularly incisive. While the antitrust laws were ostensibly intended to promote competition, they have been employed repeatedly—by both government and private plaintiffs—to restrain and restrict the competitive market process. The laws have been used to protect the existing industrial structure, which is exactly what Smith feared most about government monopoly generally. They have served to restrain trade and competition, while the real monopolists in the American business system—the firms that hold legal monopoly—remain relatively immune from antitrust prosecution. Finally, antitrust laws have clearly been abusive of “liberty and justice,” exactly as Smith had predicted.

The economic and normative case for the abolition of antitrust law is impressive. The law appears to have lost all of its claim to legitimacy. The burden of proof is now on those who would retain or reform antitrust law, to demonstrate why all the laws should not be repealed.

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¹Some of the following discussion is taken from Dominick T. Armentano, “Efficiency, Liberty, and Antitrust Policy” Cato Journal 4, no. 3 (Winter 1985): 925–32.

²Roger Pilon, “Corporations and Rights: On Treating Corporate People Justly,” Georgia Law Review 13 (Summer 1979): 1245–1370.

³This treatment has been most obvious in Federal Trade Commission enforcement of the Robinson-Patman Act. See Lowell B. Mason, The Language of Dissent, (Cleveland, Ohio: The World Publishing Company, 1959).

⁴See, for example, a concise review of the standard economic-welfare model in Wesley J. Liebeler, “Intrabrand Cartels under GTE Sylvania,” UCLA Law Review 30 (October 1982): 13–17.

⁵Dominick T. Armentano, “Antitrust Policy: Reform or Repeal?” Cato Institute Policy Analysis no. 21 (January 18, 1983): 9–10.

⁶Even Robert Bork admits that this position can be intelligently argued. See Robert H. Bork, “The Rule of Reason and the Per Se Concept,” Yale Law Journal 75 (January 1966): 390.

⁷Gerald P. O’Driscoll, Jr., and Mario J. Rizzo, The Economics of Time and Ignorance (Oxford: Basil Blackwell, 1985), pp. 154–58. See also, Roy E. Cordato, Welfare Economics and Externalities in an Open-Ended Universe: A Modern Austrian Perspective (Boston: Kluwer, 1992).